Set the Rules of the Game, but Do Not Intervene in the Game Itself

In times of crisis, the state needs to support particularly burdened households and businesses. However, interventions aiming to influence pricing in competitive markets go much further: They change the price mechanism which signals shortages, channels supply and steers investment. 

The sharp rise in fuel prices is placing a burden on households and businesses. It affects especially those who can hardly adjust their consumption at short notice: commuters in rural areas, as well as businesses for which fuel accounts for a high proportion of costs and who cannot respond promptly by increasing their sales prices. It is therefore understandable that policymakers should seek ways to cushion the impact of these sudden increases in financial pressure. 

Such crisis measures usually raise two questions: Does the financial support reach those most affected, and what are the costs of the selected policy?

However, another distinction is even more important. Temporary financial relief during a crisis is different from an intervention that alters the way a market functions.  

For example, since 1 April, petrol stations are only allowed to raise their prices once a day, at midday; price reductions are possible at any time. The primary aim was to achieve greater transparency.  

It is to be doubted whether this crisis policy was effective at lowering prices. An initial study by ZEW and DICE shows that, following the introduction of the rule, petrol margins rose in the short term by around five to six cents per litre.  

As an economic policy intervention, this measure should be viewed very critically. Prices are not a political variable to be adjusted at will, but key parameters of economic activity. When in doubt, the principle should therefore be: Let the economy take care of what lies in its own territory.

Now, intervention in pricing is set to go one step further. The federal and state governments have agreed to introduce a temporary fuel price cap, modelled on the Belgian or Luxembourg systems, by 1 January 2027 at the latest. Exactly how this is to be designed has yet to be determined.

In Belgium and Luxembourg, the government sets maximum prices on the basis of individual cost components and margins. The state must now assess which procurement costs are reasonable, which transport and storage costs should be taken into account and what margin companies should be allowed to retain.

Such a task is familiar in the case of natural monopolies. Electricity and gas grids are regulated because operating parallel grid infrastructures is often economically inefficient. Even there, questions about which costs should be recognised and what constitutes an appropriate rate of return regularly lead to complex procedures, expert opinions and legal disputes.

The fuel market is organised differently. Here, suppliers, refineries, importers and filling stations compete with one another. Prices are determined by the market.  

Prices influence not only what consumers pay at the pump today. They also shape decisions throughout the entire value chain. If, for example, diesel margins in Germany are high by international standards, this creates an incentive to produce additional volumes and supply them to the German market. If the return on a particular use is capped administratively, refineries may produce other products, redirect supplies to other markets or invest at other locations.

This does not mean that every high price is evidence of a well-functioning competitive market. Where companies possess market power and abuse it, competition law comes into play. Rules governing the abuse of dominant market positions already exist for this purpose. There is, however, an important distinction between controlling market power and setting a price in a market by regulation: Competition policy defines the rules within which a market operates. Price regulation takes over part of the market’s role itself.

The example of France shows that crisis support can also be designed differently. The French government provides targeted support to economic sectors that are particularly dependent on fuel. At the same time, assistance is provided to lower-income workers who face particularly long commuting distances. Such programmes also involve costs and difficulties in determining eligibility. Their advantage, however, is that they address the burden directly without simultaneously intervening in pricing.

Crises require pragmatic policies – interventions in market behaviour require systematic policies. The experience of the 12 o’clock fuel regulation gives reason for caution. A fuel price cap would constitute a considerably deeper intervention, with greater potential side effects. It should not be introduced without compelling evidence.